Stop bailing out the states

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Most states’ fiscal years are ending, accompanied by what is becoming an annual ritual – demands that Washington bail out state and local deficits. In 2008 and 2009, federal taxpayers covered for the featherbedding and corruption at the local level by awarding state and local governments a total of about $275 billion in bonus payments. Right now on Capitol Hill, state and local governments are demanding a fresh $50 billion round of bailout checks.

Set aside that when states refuse to pay their own bills, they hand the debt to federal taxpayers – all of whom live in states.

Set aside that the states’ claims they must be subsidized because “we are required by law to balance our budgets” is a total political fiction – more on that below. Set aside that governors refuse to make hard budget choices, demand bailouts for their states — then campaign by denouncing the big spenders in Washington.

BOOKKEEPING SWINDLE

The core issue is that Washington should not ship cash to states and localities at all, whether on a routine basis, as has been done for decades, or in the new form of special-pleading bailouts. The “laboratories of democracy” ought to pay their own ways. Sending the bill to Washington only encourages carelessness with money, indeed, can make fiscal negligence seem a virtue: when money falls from the sky, why not waste as much as possible locally? It is time to end the U.S. national bookkeeping swindle of having the federal government borrow money to hand to state and local governments to spend without restraint. State and local governments should obtain their own funds, via taxes or their own borrowing: this would increase accountability.

There are two types of federal transfers to states and localities: routine, and bailout. Over the last three years, Washington has handed nearly $2 trillion in regular payments to state and local governments, all funds obtained by borrowing. The $275 billion in bonus payments to states is atop the $2 trillion in routine funding. In fiscal 2010, states had about $1.3 trillion in revenue, about $400 billion of which came from the federal government either to help pay for federally mandated entitlements such as Medicaid, or to pay for local want-items such as roads and public transit, or simply as bailouts. That’s about a third of state funding being federal in origin. About 40 percent of local government revenue is direct-federal or a pass-along of federal money through a state, with roughly $300 billion in federal payments to various city, county and town governments in fiscal 2010.

The record $1.6 trillion deficit being run by Washington this fiscal year would decline by nearly half were it not for handouts to state and local governments. All recent federal deficits would decline by a third to a half, depending on the year, if Washington stopped forwarding borrowed money to states and cities; the dizzying $13 trillion national debt would be much lower.

TOLL ON TAXPAYERS

Of course, if Washington did not fund state and local governments, their taxes would have to be higher, or their debts higher, or their spending lower. But the state-and-local residents benefitting from the spending would be taxing themselves, or borrowing for themselves, rather than passing their bills along to someone else.

Massachusetts residents, for example, wanted their Big Dig – unsnarling Boston traffic by moving roads underground. Why did taxpayers nationwide cover $18 billion of the $22 billion cost of a project designed to make life easier exclusively in Boston? Why do taxpayers nationwide cover the bills when Tennessee residents want cheaper health care or Virginia residents want a new subway or Florida wants high-speed rail or California wants more schoolteachers, to cite a few of many recent examples? Here, almost all the nation’s governors ask for a gift of six months of federal payment of their Medicaid costs. This merely shifts state health care costs to federal taxpayers – all of whom live in states.

The great national bookkeeping switcheroo is a reason polls show Americans feel more positive about local government than about their federal government. On a W-2 form that sums your tax year, the federal tax total is higher than it needs to be, while state and local taxes are lower than they should be. Remove the switcheroo, and most Americans would pay higher state and local taxes, while paying less to Washington. Suddenly governors would no longer be able to promote themselves as budget-balancers, while the president and Congress would seem much more careful with money than they do today.

Government accounting should be honest and straightforward. Instead the current system is deceptive, making state and local governments appear to be more cost-effective than they are, while causing the federal government appear to be more spendthrift than it is. According to the Center on Budget and Policy Priorities, states will be $281 billion in the red in fiscal 2010 2011 (see slide 7), despite generous handouts from Washington. This doesn’t seem like fiscal conservatism. Yet voters think state and local governments are careful with money while Washington writes blank checks. Fix the switcheroo, and local governments would be revealed as wasteful, while federal government would seem much more cost-effective.

FUNNY MONEY

At the local level, one is more likely than in Washington to find no-show patronage jobs or more administrators than workers. Since the recession began in 2008, about 7 million people in the United States have been fired or laid off – but just 231,000 were state and local government workers, would are protected by the great national bookkeeping switcheroo. Many state and local governments combine overstaffing with terrible performance. The Providence Journal recently reported that Rhode Island DMV customers “wait hours for a 10-minute transaction” while drivers’-licenses offices often are closed because a staff training project, expected to take three months, is taking a year. State offices like this likely would perform better with leaner staffs.

Partly because local governments operate on funny-money from Washington, their pension systems are out of control. New York State has significant pension corruption; New York City has dozens of former employees who retired in their 40s with pensions of $100,000-plus per year; the Orange County Register recently reported that California has more than 3,000 retired public-school administrators receiving $100,000-plus pensions, many of whom “retired” to activate pensions and then immediately went back on payroll in the same job. It’s fun and easy for states to hand out candy when the sweets comes from Washington.

In fiscal 2006, when the economy was hot, states had a combined $74 billion surplus. Did they save this money to carry them through lean years – or, heaven forbid, repay previous giveaways from the federal purse? Except in a few cases such as North Dakota, the states spent every penny. Now states and counties want the federal deficit to bail them out. As long as bailouts from Washington continue, so will insatiable local appetites for money from the sky.

FOOTING THE BILL

Last week when President Barack Obama appealed for the extra $50 billion in state bailouts, he said this was to avert local government layoffs. Well and good: but why don’t the states and cities tax themselves to prevent layoffs, rather than handing the bill to someone else?

Republicans, and the Tea Party crowd, say they believe in states’ rights — what about states’ responsibilities? Even Republican governors, from California and other states, are demanding the extra bailout now before Congress. Maybe that $50 billion makes sense in the short term – but there should be a condition attached, namely, that local governments agree to a long-term reduction in federal support. End the national bookkeeping switcheroo, and have states and cities pay their own ways.

We also don’t seem to realize that we all have our hands in each other’s pockets. We are addicted to other people’s money, and don’t seem to realize, or care, that ‘they’ are ‘us.’ There is no free lunch.

This ofcourse is an out rage. Vermont and South Carolina among many are spending and accepting Federal money rather than a reduction in spending. Vermont Medicaid arrogantly continues to spend even paying for infant circumcisions!

The most important thing is for the states to continue to move ahead with their spending plans in a business as usual mode — the fact is that the more the states can spend, the more they will get from Washington, DC — the real question for the states is how they can accelerate spending on salaries, pensions, bonuses, construction, and everything else they do — states should be initiating sharp increases in pay and bonuses for all state employees — given the wage gap between state employees and others, such as professional atheletes and moviestars, it would be immoral not to raise salaries and benefits for state workers — the US will find the money or print it…

This system became prevalent in the FDR years, when his massive federal funding programs gave money in order to gain states’ support. Funds were often routed through union bosses, who then coerced their union members to support his candidates. I’m not saying FDR invented political corruption, but he certainly took it to a new level in the White House. It’s eerily striking how similar FDR and BO are:

Neither had actual life experience, spending most of their time in academia
Both inherited a mess from the previous administration
Neither did anything to reverse what created the mess
Both were great orators
After years of being in office, neither had accomplished anything at all
Both implemented extremely socialist programs

Just like with FDR, after BO’s time in office unemployment will still be at 10%, we’ll be in more debt and we’ll be several steps closer to socialist bankruptcy.

“inherited a mess from the previous administration” – well, just about the biggest mess (near total meltdown)in 70 years, remember. I am amazed at what this administration has achieved so far. And regarding life experience: are you seriously suggesting that this president is lacking experience compared to an eternally spoiled and pampered G.W.Bush?

Author Profile

Gregg Easterbrook is the author of nine books including, most recently, "The King of Sports" and "The Leading Indicators." He is a contributing editor to The Atlantic and to The Washington Monthly, a former visiting fellow at the Brookings Institution and distinguished fellow of the Fulbright Foundation. He writes the Tuesday Morning Quarterback column for ESPN.